GOODWILL, CORE DEPOSIT PREMIUM AND OTHER INTANGIBLE ASSETS

Heartland had goodwill of $127.7 million at September 30, 2016, and $97.9 million at December 31, 2015. Heartland conducts its annual internal assessment of the goodwill both collectively and at its subsidiaries as of September 30. There was no goodwill impairment as of the most recent assessment.

Heartland recorded $29.8 million of goodwill in connection with the acquisition of CIC Bancshares, Inc., parent company of Centennial Bank, based in Denver, Colorado on February 5, 2016. The goodwill associated with this transaction is not deductible for tax purposes. As part of this acquisition, Heartland recognized core deposit intangibles of $6.4 million that are expected to be amortized over a period of 10 years on an accelerated basis. The core deposit intangibles associated with this transaction are not deductible for tax purposes. In addition, Heartland recognized commercial servicing rights of $190,000.

Heartland recorded $41.0 million of goodwill in connection with the acquisition of Premier Valley Bank, based in Fresno, California on November 30, 2015. The goodwill associated with this transaction is not deductible for tax purposes. As part of this acquisition, Heartland recognized core deposit intangibles of $8.0 million that are expected to be amortized over a period of 10 years on an accelerated basis. The core deposit intangibles associated with this transaction are not deductible for tax purposes. In addition, Heartland recognized commercial servicing rights of $616,000.

Heartland recorded $2.5 million of goodwill in connection with the acquisition of First Scottsdale Bank, N.A., based in Scottsdale, Arizona on September 11, 2015. The goodwill associated with this transaction is not deductible for tax purposes. As part of this acquisition, Heartland also recognized core deposit intangibles of $357,000 that are expected to be amortized over a period of 10 years on an accelerated basis. The core deposit intangibles associated with this transaction are not deductible for tax purposes.

Heartland recorded $213,000 of goodwill in connection with the acquisition of Community Bancorporation of New Mexico, Inc., parent company of Community Bank, based in Santa Fe, New Mexico, on August 21, 2015. The goodwill associated with this transaction is not deductible for tax purposes. As part of this acquisition, Heartland also recognized core deposit intangibles of $1.7 million that are expected to be amortized over a period of 10 years on an accelerated basis. The core deposit intangibles associated with this transaction are not deductible for tax purposes.

Heartland recorded $18.6 million of goodwill in connection with the acquisition of Community Banc-Corp of Sheboygan, Inc., the parent company of Community Bank & Trust, based in Sheboygan, Wisconsin on January 16, 2015. The goodwill associated with this transaction is not deductible for tax purposes. As part of this acquisition, Heartland recognized core deposit intangibles of $6.0 million that are expected to be amortized over a period of 10 years on an accelerated basis. The core deposit intangibles associated with this transaction are not deductible for tax purposes. In addition, Heartland recognized commercial servicing rights of $4.3 million.

Goodwill related to the CIC Bancshares, Inc., Premier Valley Bank, First Scottsdale Bank, N.A., Community Bancorporation of New Mexico, Inc. and Community Banc-Corp of Sheboygan, Inc., resulted from expected operational synergies, increased market presence, cross-selling opportunities, and expanded business lines.

Other intangible assets consist of core deposit intangibles, mortgage servicing rights, customer relationship intangible, and commercial servicing rights. The gross carrying amount of other intangible assets and the associated accumulated amortization at September 30, 2016, and December 31, 2015, are presented in the table below, in thousands:



	September 30, 2016						December 31, 2015
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortizing intangible assets:
Core deposit intangibles	$	43,504	$	19,913	$	23,591	$	37,118	$	15,460	$	21,658
Mortgage servicing rights	49,494		17,652		31,842		45,744		15,430		30,314
Customer relationship intangible	1,177		846		331		1,177		815		362
Commercial servicing rights	6,409		2,345		4,064		5,685		1,074		4,611
Total	$	100,584	$	40,756	$	59,828	$	89,724	$	32,779	$	56,945

The following table shows the estimated future amortization expense for amortizable intangible assets, in thousands:



	Core Deposit Intangibles		Mortgage Servicing Rights		Customer Relationship Intangible		Commercial Servicing Rights		Total
Three months ending December 31, 2016	$	1,206	$	2,968	$	10	$	232	$	4,416
Year ending December 31,
2017	4,409		7,219		40		908		12,576
2018	3,900		6,187		39		836		10,962
2019	3,418		5,156		38		657		9,269
2020	2,975		4,125		37		482		7,619
2021	2,457		3,094		35		489		6,075
Thereafter	5,226		3,093		132		460		8,911
Total	$	23,591	$	31,842	$	331	$	4,064	$	59,828

Projections of amortization expense for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of September 30, 2016. Heartland's actual experience may be significantly different depending upon changes in mortgage interest rates and market conditions. Mortgage loans serviced for others were $4.26 billion and $4.06 billion as of September 30, 2016, and December 31, 2015, respectively. Custodial escrow balances maintained in connection with the mortgage loan servicing portfolio were approximately $28.3 million and $19.2 million as of September 30, 2016, and December 31, 2015, respectively. The fair value of Heartland's mortgage servicing rights was estimated at $38.1 million at September 30, 2016, and $40.9 million at December 31, 2015.

Heartland's mortgage servicing rights portfolio is comprised of loans serviced for the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Government National Mortgage Association. The servicing rights portfolio is separated into 15- and 30-year tranches, and the servicing rights portfolio is an asset of one of Heartland's subsidiaries.

The fair value of mortgage servicing rights is calculated based upon a discounted cash flow analysis. Cash flow assumptions, including prepayment speeds, servicing costs and escrow earnings are considered in the calculation. The average constant prepayment rate was 13.13% and 10.65% for the September 30, 2016, and December 31, 2015, valuations, respectively. The discount rate was 9.26% and 9.25% for the September 30, 2016, and December 31, 2015, valuations, respectively. The average capitalization rate for the first nine months of 2016 ranged from 88 to 141 basis points compared to the range of 65 to 138 basis points for 2015. Fees collected for the servicing of mortgage loans for others were $3.1 million and $2.6 million for the quarter ended September 30, 2016, and September 30, 2015, respectively and $9.0 million and $7.8 million for the nine months ended September 30, 2016, and September 30, 2015, respectively.

The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the nine months ended September 30, 2016, and September 30, 2015:



	2016			2015
Balance at January 1,	$	30,314		$	24,984
Originations	9,323			11,062
Amortization	(7,795		)	(6,446		)
Balance at September 30,	$	31,842		$	29,600
Fair value of mortgage servicing rights	$	38,127		$	40,166
Mortgage servicing rights, net to servicing portfolio	0.75		%	0.75		%

Heartland's commercial servicing rights portfolio was initially acquired with the Community Banc-Corp of Sheboygan, Inc. transaction that closed on January 16, 2015. Heartland also acquired commercial servicing rights portfolios with the Premier Valley Bank transaction that closed on November 30, 2015, and the CIC Bancshares, Inc. transaction that closed on February 5, 2016. The commercial servicing portfolio is comprised of loans guaranteed by the Small Business Administration and United States Department of Agriculture that have been sold with servicing retained by Heartland, which totaled $175.6 million. The commercial servicing rights portfolio is separated into two tranches, loans with a term of less than 20 years and loans with a term of more than 20 years, at each subsidiary. Fees collected for the servicing of commercial loans for others were $230,000 and $78,000 for the quarter ended September 30, 2016, and September 30, 2015, respectively and $685,000 and $438,000 for the nine months ended September 30, 2016, and September 30, 2015, respectively.

The fair value of each commercial servicing rights portfolio is calculated based upon a discounted cash flow analysis. Cash flow assumptions, including prepayment speeds and servicing costs, are considered in the calculation. The range of average constant prepayment rates for the portfolio valuations for the first nine months of 2016 was 6.65% to 7.63% compared to 7.33% to 8.10% as of December 31, 2015. The discount rate range was 12.07% to 13.59% for the September 30, 2016, valuations compared to 12.35% to 13.49% for the December 31, 2015, valuations. The capitalization rate for 2016 ranged from 310 to 445 basis points compared to 180 to 445 basis points for 2015. The total fair value of Heartland's commercial servicing rights was estimated at $4.4 million as of September 30, 2016.

The following table summarizes, in thousands, the changes in capitalized commercial servicing rights for the nine months ended September 30, 2016, and September 30, 2015:



	2016			2015
Balance at January 1,	$	4,611		$	—
Purchased commercial servicing rights	190			4,255
Originations	533			704
Amortization	(1,229		)	(802		)
Valuation allowance on commercial servicing rights	(41		)	—
Balance at September 30,	$	4,064		$	4,157
Fair value of commercial servicing rights	$	4,397		$	4,412
Commercial servicing rights, net to servicing portfolio	2.38		%	2.33		%

Mortgage and commercial servicing rights are initially recorded at fair value in net gains on sale of loans held for sale when they are acquired through loan sales. Fair value is based on market prices for comparable servicing contracts, when available, or based on a valuation model that calculates the present value of estimated future net servicing income.

Mortgage and commercial servicing rights are subsequently measured using the amortization method, which requires the asset to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Servicing rights are evaluated for impairment at each Heartland subsidiary based upon the fair value of the assets as compared to the carrying amount. Impairment is recognized through a valuation allowance for specific tranches to the extent that fair value is less than carrying amount at each Heartland subsidiary. At September 30, 2016, no valuation allowance was required on commercial servicing rights less than 20 years and a $41,000 valuation allowance was required on commercial servicing rights greater than 20 years. At December 31, 2015, no valuation allowance was required for any of Heartland's servicing rights.

The following table summarizes, in thousands, the book value, the fair value of each tranche of the commercial servicing rights and any recorded valuation allowance at each respective subsidiary at September 30, 2016, and December 31, 2015:



September 30, 2016	Book Value- Less than 20 Years		Fair Value- Less than 20 Years		Impairment- Less than 20 Years		Book Value- More than 20 Years		Fair Value- More than 20 Years		Impairment- More than 20 Years
Centennial Bank and Trust	$	25	$	27	$	—	$	118	$	121	$	—
Premier Valley Bank	171		188		—		373		332		41
Wisconsin Bank & Trust	916		1,031		—		2,502		2,698		—
Total	$	1,112	$	1,246	$	—	$	2,993	$	3,151	$	41
December 31, 2015
Centennial Bank and Trust	$	—	$	—	$	—	$	—	$	—	$	—
Premier Valley Bank	189		200		—		417		432		—
Wisconsin Bank & Trust	1,048		1,097		—		2,957		3,173		—
Total	$	1,237	$	1,297	$	—	$	3,374	$	3,605	$	—